How to Protect Your Practice From Your Spouse
From a personal perspective, prenuptial agreements are not very appealing, but from a common sense and legal point of view, they can be essential.
Getting married is the biggest financial decision in most people’s lives, but many do not consider the financial entanglements that marriage creates. Just ask anyone who has lost a house or retirement plan in a divorce.
Despite reading articles about the importance of using a prenuptial agreement as a tool for planning, plenty of people feel uncomfortable with prenuptial agreements. Luckily, there are secondary measures, not all as good as a prenuptial agreement, but perhaps more in line with your personal views and the realities of your relationship. For example, there are ways to structure corporate documents to insulate your medical practice from divorce proceedings, whether your own divorce or that of another physician in your practice. Buy-sell agreements among shareholders and corporate insurance policies in the event of a forced buyout can be effective tools to protect the practice. Likewise, postnuptial agreements are an option, even if the prenuptial agreement seemed awkward at the time of marriage. A postnuptial agreement can be limited to a spouse relinquishing claims on your interest in your medical practice. This can be a mandatory prerequisite for membership in a practice group, essentially forcing all group members to enter either prenuptial or postnuptial agreements to protect the medical practice from divorce. This can be effective, as the pressure to enter such an agreement is external, and the blame for needing a postnuptial agreement can be shifted to the attorney for the medical practice. It’s easy to blame the attorney, just give it a try.
Everyone (whether married or not) should make sure their estate plans are up to date and there are a variety of situations in which prenuptial agreements should part of those estate plans. The most important of these situations are a second marriage, or where at least one spouse has children before the marriage.
Let’s start with what happens in a second marriage from a social perspective. Statistics tell us that 2 out of 3 second marriages fail. Yet hope springs eternal, as does love, and plenty of divorced folks get remarried. Those who remarry are more experienced than the first time around, having learned either personally or through a friend the expense and stress associated with a difficult divorce. Most people have heard about prenuptial agreements, but may not understand how a prenuptial agreement can help them avoid a long and costly divorce, while also protecting their Estate for their children. Essentially, a prenuptial agreement should streamline a divorce in the event the marriage does not work out, having resolved the marital financial issues before the marriage. The prenuptial agreement, however, will not address the issues as to any children of the marriage, such as child support and custody. What it can do for you is to protect your medical practice, your salary, your pension and your retirement account. It can state how the marital home is to be handled and what property is separate property. The significance of protecting your medical practice from equitable distribution during a divorce, and your salary from years of alimony cannot be understated.
A prenuptial agreement can set forth the financial parameters of the marriage from the day of the wedding up through and including how your Estate is handled after you die. It can state whether your spouse has a right to an interest in your retirement benefits and your medical practice. It can state whether or not your spouse waives the right to claim spousal support or alimony. Some couples do not agree on a straightforward waiver of rights, but instead agree on a sliding scale—the longer the marriage lasts, the greater a dependent spouse’s entitlement to a portion of specified marital property.
In addition to setting the financial parameters of your marital relationship, a prenuptial agreement is the best tool to prevent your Estate from ending up in the hands of someone else’s children. Let’s consider Mom, who at 65 looks great (because she follows her family physician’s advice). Last year, she married Bob. Mom has a son and a daughter, but Mom did not get around to having a pre-nuptial agreement…so what happens when Mom dies before Bob and she does not have a will? If Mom is a resident of Pennsylvania, we need to consider Bob’s statutory right of election. This law allows, but does not require, Bob to “elect” to take 1/3 of Mom’s Estate. The right of election exists whether or not Mom has a Will, and regardless of what Mom leaves Bob in her Will. The only way to cancel this right is by agreement between Mom and Bob.
If Bob elects against Mom’s will, he gets 1/3 of Mom’s assets that pass through her Will. Let’s say Mom’s Estate assets are a $200,000 investment account, and her house worth $400,000—a total of $600,000—essentially the money Dad made through hard work and careful saving. This means that Bob gets $200,000, Mom’s son inherits $200,000, and Mom’s daughter inherits $200,000.
Did Mom want Bob to get $200,000 from her Estate? Didn’t Mom always say she would leave everything to her children 50/50?
A simple solution would have been a prenuptial agreement stating that Mom and Bob mutually waive their rights to each other’s Estates, including a waiver of their statutory right to claim an Elective Share. Or, if there was no prenuptial agreement, a post-nuptial agreement is another option. The agreement to waive the elective share need not occur before the marriage.
In the event Mom does not want to leave Bob without anything, Mom and Bob can explore options that express loyalty and respect for her late husband and their children, as well as for Bob’s well-being after she dies. For example, Mom may wish to grant Bob a life estate in her home, so long as he pays upkeep and taxes or may want to fund a testamentary trust from which Bob can obtain income and support after her death. Depending on Mom’s wishes and the situation, this can be accomplished in a prenuptial agreement, a Will or by Deed.
In second marriages, using Mom above as the ongoing example, there is a particular need to address where Mom will be buried. If she does not make her intentions as to her remains firmly known, then Pennsylvania law allows Bob as the surviving spouse the unfettered right to decide where she will be buried. Bob might want her to be buried in Florida near his winter condo. Mom’s children, however, may want Mom to be buried next to Dad in the established family plot in Pennsylvania. To resolve this issue, Mom can state her intentions as to her remains in her Will.
There are plenty of other marital issues that can be addressed with other proper estate planning tools. For example, a prenuptial agreement cannot protect Bob’s Estate from bills owed to third parties who provided Mom with “necessaries” such as a hospital care. Nor can a prenuptial agreement protect Bob’s Estate from the Commonwealth of Pennsylvania seeking dollar-for-dollar reimbursement for all Medicaid benefits provided to Mom. Depending on which issues are relevant to each couple, there are estate planning tools that can be used to address the various concerns, including placing monies in an irrevocable inter vivos trust.
Second marriages involving younger couples are equally fraught with their own types of financial concerns that benefit from a prenuptial agreement. In the case of younger couples who remarry with children from a prior marriage, the prenuptial agreement should address the thorny issues of how income and assets will be allocated to children and step-children for things ranging from medical expenses, to college tuition, to legal fees for custody and child support proceedings.